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A Lesson From The Heritage Foundation’s Economic Freedom Index

What do Hong Kong, Singapore, Australia, and Switzerland have in common? They are four of the top five ranked countries in the conservative Heritage Foundation’s 2012 Index of Economic Freedom.

The Heritage Foundation scores countries based on a variety of factors, including the extent to which they depend on the rule of law, have limited government and regulatory efficiency, and the openness of their markets. The Freedom Index then ranks each country based on its score, categorizing them as “Free,” “Mostly Free,” “Moderately Free,” “Mostly Unfree” or “Repressed.”

For those wondering, the United States ranks tenth and is “Mostly Free.”

While Public Citizen does not endorse the index or its criteria, we do find one unique commonality between Hong Kong, Singapore, Australia, and Switzerland that is particularly noteworthy: Each of these countries imposes taxes on financial transactions to curb speculation.

Take Hong Kong for example. The top-ranked country on the index imposes a “stamp tax” of 0.3 percent on stock trades. And the Heritage Foundation extols Hong Kong’s “robust and transparent investment framework,” saying that it “has demonstrated a high degree of resilience during the ongoing global turmoil and remains one of the world’s most competitive financial and business centers.”

Thus, despite frequent scaremongering on both sides of the political spectrum that financial speculation taxes would destroy markets and devastate the economy, the top-ranked countries in the conservative think tank’s estimation prove that such taxes, when implemented properly, have done no such thing.

In fact, financial speculation taxes would likely restore the economy. That’s because they have the dual ability to curb some of the worst excesses of financial market speculation and simultaneously raise significant amounts of money to heal the ailing budget.

Short-term speculation doesn’t add value to the real economy, and it threatens near- and long-term economic havoc. This is not just speculation. (Pardon the pun.) We have witnessed the continued fallout from Wall Street’s excessively risky short-term trading activities, from the 2008 financial crisis to the 2010 flash crash and, most recently, Knight Capital’s rogue algorithm trading debacle.

A financial speculation tax in the U.S. would redirect activities to more productive and efficient allocation of capital and foster long-term investment that would boost job creation and strengthen our economy.

Even a miniscule tax, such as the 0.03 percent fee—that’s three pennies on $100 of Wall Street trading and is one-tenth the size of Hong Kong’s “stamp tax” rate—as proposed by U.S. Sen. Tom Harkin (D-Iowa) and U.S. Rep. Peter DeFazio (D-Ore.), would cut down on speculative activities like computer-driven high-frequency algorithm trading. At the same time, those pennies would quickly add up, raising more than $350 billion dollars over the next decade, according to the nonpartisan Joint Committee on Taxation.

Other countries are using financial speculation taxes successfully; it’s time we do too. The United States is in desperate need of a permanently robust and resilient economy. A financial speculation tax can help get us there.